Cotton yarn spinners heading towards six-year-low revenues in current fiscal

By: |
August 27, 2020 2:30 AM

The decline in yarn offtake since Covid-19 afflictions, which began in February 2020, has meant the current fiscal began with higher inventories of 4-4.5 months compared with 3-3.5 months on an average in the past two fiscals.

With yarn prices falling more than cotton prices, cotton-yarn spread is seen narrowing down to Rs 75-80 per kg this fiscal versus Rs 80-85 per kg last fiscal, which will contract operating margins by 350-400 bps. With yarn prices falling more than cotton prices, cotton-yarn spread is seen narrowing down to Rs 75-80 per kg this fiscal versus Rs 80-85 per kg last fiscal, which will contract operating margins by 350-400 bps.

Tepid domestic and export demand following the Covid-19 pandemic is pushing cotton spinners to the wall as revenues are estimated to decline 30-35% in the current fiscal, marking a six-year-low. This, along with inventory losses and lower profitability, is expected to result in moderation in credit quality of cotton spinners this fiscal, a study of 150 Crisil-rated firms shows.

Domestic demand for cotton yarn, which accounts for over 70% of overall demand, has been impacted because of slackness in end-user segments such as readymade garments (RMG) and home textiles. Cotton yarn exports, too, have been materially affected because of fewer orders from China and Bangladesh, which account for over half of India’s exports. Revenue from exports had already wound back by a third last fiscal, with China increasing procurement from other countries, predominantly Vietnam.

The decline in yarn offtake since Covid-19 afflictions, which began in February 2020, has meant the current fiscal began with higher inventories of 4-4.5 months compared with 3-3.5 months on an average in the past two fiscals. With demand likely to revive only from the second half of this fiscal, inventories will remain high in the first half.

Hetal Gandhi, director, Crisil Research,said: “Cotton spinners are facing a double whammy of sharp erosion in revenue and inventory losses. Revenues of the domestic industry, which had fallen last fiscal, is set to slip again and touch a six-year-low. Additionally, inventory losses loom because cotton prices have declined 10-15% on a sequential basis in the first quarter of the current fiscal.”

With yarn prices falling more than cotton prices, cotton-yarn spread is seen narrowing down to Rs 75-80 per kg this fiscal versus Rs 80-85 per kg last fiscal, which will contract operating margins by 350-400 bps. Further, the working capital cycle has got elongated because of a stretch in receivables following steep business pressure on key end-users such as readymade garment (RMG) makers. Consequently, spinners have been depending more on bank borrowings, leading to high utilisation of working capital limits.

Krishna Ambadasu, associate director, Crisil Ratings, said: “Already the credit ratio for Crisil-rated cotton spinners has deteriorated between April-July 2020. Tepid business performance and consequent low cash flows from operations is aggravating liquidity pressures, in the first half of the current fiscal. Interest coverage ratio for Crisil rated players is expected to slide to below 1.6 times this fiscal versus 2.7 times last fiscal.”

According to Crisil, most firms are managing the situation by availing of moratorium on debt servicing, additional Covid-19 related bank lines, and government measures such as the relief package to micro, small and medium enterprises. Additionally, one-time restructuring of loans announced by RBI will be a viable option amidst tightness in accruals to repayments in current fiscal. The benefit of continuing soft cotton prices and liquidation of high-cost inventories from the past fiscal should help cotton spinners perform better in the second half of the current fiscal, provided demand limps back, Crisil added.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Anil Agarwal gearing up to raise a turnaround fund with Centricus
2Apple’s festive cheer for fans: Soon, buy iPhone, iMac from online store ahead of this Diwali
3Apple Store Online will launch in India on September 23 bringing full range of products and support “directly” to customers